New Zealand business confidence slumped to the lowest since the 1970s in the fourth quarter as the prospect of higher interest rates and weaker demand fuel fears of a sharper-than-expected recession.
(Bloomberg) — New Zealand business confidence slumped to the lowest since the 1970s in the fourth quarter as the prospect of higher interest rates and weaker demand fuel fears of a sharper-than-expected recession.
Expectations for profits, investment and hiring have tumbled and a net 33% of firms expect weaker trading in the first three months of 2023, the New Zealand Institute of Economic Research said Tuesday in Wellington. A net 70% of firms expect the economy to deteriorate over the next 12 months, the lowest reading from the quarterly survey of business opinion since 1974.
“Clearly businesses are very worried about the future state of demand and they are logically expecting to ease back on investment and headcount in response,” said Miles Workman, senior economist at ANZ Bank New Zealand. “The data suggest the RBNZ may be engineering a sharper economic contraction than it is forecasting.”
Investors have pared bets that the Reserve Bank will follow November’s record rate hike with another 75 basis-point move in February, with swaps showing a 50-point step may now be more likely. The also expect the central bank to begin cutting rates in the second half of this year.
The RBNZ raised the Official Cash Rate to 4.25% in November and projected the benchmark would need to reach 5.5% to quell inflation.
Ongoing inflation pressure will need to be taken into account by the RBNZ at its Feb. 22 meeting, but so will the prospect of weaker demand, said NZIER principal economist Christina Leung, adding that a 50-point hike may be sufficient.
The RBNZ projects a shallow recession from the second quarter this year, while bank economists are wary the contraction could be deeper.
Labor shortages are currently the biggest constraint on activity, with a net 68% of firms in NZIER’s survey saying it is harder to find skilled workers. However, firms are now reporting that weaker sales loom as a bigger issue, NZIER said.
Companies are also growing more cautious about hiring, and a net 9% plan to fire workers.
Costs faced by businesses are rising and 71% plan to raise selling prices in the first quarter. Still, many companies are having to absorb costs and face declining profits, Leung said.
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